Wage Shock: Part 2

In Part I, I looked at the economic backdrop of the 1970s and the 1980s and gave my own view of why wage shock therapy back then was the right judgment call. In Part II, I will study Professor Lim’s ideas for the ability to (i) solve the income gap as he intended to, and (ii) whether they prove to be a viable path for Singapore’s next phase of economic growth. I will refer extensively to Professor Lim’s comments, the text has been acquired from: http://www.todayonline.com/CommentaryandAnalysis/Commentary/EDC121026-0000014/Shock-therapy-II-revisited)

This is genuinely a noble intention that I agree with, especially in light of the widening income gap.

“..advocated a three-year pause to the ever-increasing rate of escalation of income of the highest-income group..”

This part has caused quite a bit of controversy, so let’s explore this idea later in the essay.

“…Why has there been such a serious upward escalation of pay for the upper-income group followed by a freezing or declining of pay for the lower-income group… in my view, this is associated with global Darwinian capitalism and, in Singapore’s case, exacerbated by the huge intake of cheap, very low-wage workers from our neighbouring countries…”

The Professor is right on the fact that the influx of low wage workers from the region has depressed wages at the bottom end. Capitalism is inherently Darwinian in nature when one considers that there is competition, and that only the fittest will truly survive. Generally speaking, it is the cold-blooded and ruthless nature Darwinian capitalism that has compelled employers, firms, and businesses to use all means available to keep their costs low and maximise revenue – they are profit-seeking, after all – and one of the methods include the employment of cheaper foreign labour. The logic is that if wage costs are low, profits can be maximised.

“…however, my proposal to have a three-year pause to the salaries of the highest-income group (the pyramid or apex group) was put aside. Indeed, there was little public interest in this matter…”

This is where the real controversy is.

“…I did not propose a maximum salary ceiling. Neither did I propose a super-tax for this group. I only proposed a salary pause for a period of three years, and through moral suasion, or NWC recommendation with the endorsement of the Government.

My fear was that without the recommendation of a pause, the salaries of the top pyramid group would continue its upward trend, as it had come to pass in the last decade or so. As the pause would take the form of a recommendation, prior contracts for salary increases should be adhered to. Legal contracts are sacrosanct and should not be broken.

“…The pause, however, would have at least the effect of the top-tier salaries not pulling further and further away from the central salaries. Top company executives might even think of rewarding the shareholders and also themselves with dividend payment in lieu of still bigger salary increases….”

This is where I disagree with Professor Lim, despite his well-meaning intentions. This method of closing the income gap (I will elaborate more on my interpretation of the income gap and give my views on how I think it should be properly narrowed) is an artificial one and a very risky one.

Firstly, Professor Lim did not clearly specify which percentile of income earners should be earmarked for a wage freeze. Is it the top one percent? Or is it the top 10 percent? There is a lack of clarity here. If the good Professor had stated the specific tier in which the income freeze would take place, more clarity would have emerged.

But nevertheless, I shall comment on the idea of wage freezes by beginning with a description of the super rich. This group is characterised by high mobility due to their wealth, and they are thus able to move from one country to another, seeking places with the best business opportunities and the lowest taxes.

A wage freeze would chase these super-rich out of Singapore, and we would have a smaller pool to tax from as a result. Let’s also remember that the rich pay a significant amount of taxes and we want them to pay taxes so that we can give social transfers and handouts to the needy, right?

Without taxes from the super-rich, we would have less money to fund Workfare and healthcare subsidies which the lower-income groups benefit from.

As such, we wouldn’t want to kill the geese that lay the golden eggs, right?

Now, let me offer another analogy. A wage freeze is akin to saying this to a class of students: “Class, even though this exam is worth 100 marks, the highest you can score is 85 marks, because the school doesn’t want the gap in grades to be too big. So, even if you score 99 marks, your maximum mark will be capped at 85 marks.”

How is that logical? And perhaps prior to that question, you might ask, how is that fair?

The issues of fairness and logic are thus the main conundrums inherent in Professor Lim’s proposal to freeze wages at the top. It’s punishment for being capable, and that’s just illogical.

In all, I have highlighted two rebuttals against Professor Lim’s ideas: first, that we still need the super-rich to pay taxes here rather than elsewhere; and second, that the idea of a wage freeze is unfair and illogical.

“…it is important that our salaries at the top, should not move into a morally indefensible position of unconscionable but perfectly legal rewards. Every procedure and every step as required in the Companies Act has been followed….”

I think Professor Lim has mentioned a very good point here, and that is the proposition that top salaries should not move into a “morally indefensible position”. That’s a fair point because it raises the question of “What constitutes a fair wage?” And this question should not just apply to the top, but also across the board and especially at the lower end. What we want for society is that each and every worker should be paid an honest wage for his or her labour. The difficulty here is this: where do we draw the lines?

“…competitive escalation of salaries emanated from the top salary echelon, and its cumulative spiraling effect on the second- and third-tiers could eventually make our companies and our economy internationally uncompetitive to the detriment of all of us – lowest, middle or highest income groups….”

The Professor has made yet another astute observation about competitiveness and wage levels. If wages are too high, we erode competitiveness and businesses will shift elsewhere; people will buy from some other firms which are cheaper. By making this observation, Professor Lim has countered his own idea of a wage hike at the lower tiers. The wage hikes at the bottom tiers, if applied bluntly and carelessly, could hurt our competitiveness overall. When that happens, jobs will be lost.

I mentioned earlier that I will be giving my interpretation of the income gap and how I think it should properly be narrowed, and I will do so now. The income gap is a problem – we must address the issue of why wages at the bottom are not catching up. Reasons such as productivity and influx of foreign workers, among many others, come to the fore.

Wages increases, in my view, must be commensurate with increases in productivity. As mentioned earlier, wage increases cannot be applied arbitrarily and bluntly because doing so would only hurt the economy and those whom we genuinely want to help – the lower income group.

Currently, the Government is narrowing the income gap by two methods (as far as I can tell): (1) social transfers (such as Workfare), and (2) skills retraining. The first method is genuine innovation and works better than a Minimum Wage (the arguments against which have gone through the gamut several times and hence have not been raised here as a rehash) because the Government takes on the task of supplementing lower wages with top-ups that pay better than Minimum Wage. However, my concern (one which developed recently) is whether the presence of Workfare gives employers the disincentive to not raise wages on their own accord since they know that the Government will take care of it. If this mentality prevails, then wages will truly be stuck at the bottom end, and the Government will have to constantly intervene with top-ups. Is this tenable in the long-run? I am not too sure.

The second method of improving wages through skills and retraining is a more realistic solution, but one that has met with difficulty as well. This method is linked to increasing wages through gains in productivity. When we talk about productivity, we should understand that it cannot be applied everywhere in a blanket fashion, and that it does have its limits. The Government needs to understand this limitation as well. Pushing for productivity gains is very uncomfortable for companies, especially small and medium enterprises. But push, we must. Remember the Darwinian nature of capitalism that Professor Lim referred to at the beginning? This is Darwinism in action. The firms that can best adapt to the constraints of a tighter dependency-ratio-ceiling will emerge revamped and more competitive, ready to latch onto better business opportunities.

In evaluating whether Professor Lim’s ideas are (1) able to narrow the income gap, and (2) whether they provide a viable alternative path for economic growth, I believe my answer to be in the negative. Whilst wage shock can narrow the income gap, it is not without its negative consequences, as I have illustrated above in the earlier part of the exposition. Considering the potential drawbacks of wage shock itself, it is therefore doubtful that it can prove to be a viable economic alternative. Thus, the Government’s current prescription of economic growth through productivity gains and topping up wages at the bottom through social transfers, though very bitter medication, remains as the best option that Singapore has.

As they say in Chinese, “良药苦口 ” (good medicine is bitter to the palate).